Surprise fall provides ‘inflation karma’ for the Bank of England after months of disappointing data

A surprise fall in the UK’s inflation rate to 6.7 per cent in August will strengthen the case that interest rates are at or near peak, the Resolution Foundation said today (Wednesday).

The latest inflation data was well below the Bank’s forecast of 7.1 per cent – offering payback after several months of disappointing data coming in higher than expected. The recent fall was driven by easing food price inflation – down from 14.8 to 13.6 per cent – and highly volatile accommodation services. Closely watched services inflation also fell to 6.8 per cent, well below the Bank of England forecast of 7.2 per cent.

While inflation is still uncomfortably high in Britain – and higher than any other G7 economy – the latest data suggests that it is heading in the right direction at least, with a huge fall expected in October, raising hopes that the Bank of England may not need to raise interest rates any more after Thursday’s decision.

James Smith, Research Director at the Resolution Foundation, said:

“After months of disappointing data, the Bank of England has finally received some ‘inflation karma’ as price pressures eased considerably in August.

“This will strengthen the case that the Bank’s fourteen consecutive interest rate rises are now showing clear signs of putting downward pressure on inflation, and that its rate-rising cycle will soon end.

“But while mortgagors will welcome the end of interest rate rises, Britain’s wider cost-of-living crunch is likely to continue well into the coming election year.”